Lumen Technologies recent stock development
What will happen to the Lumen share now? Shares of Lumen Technologies, were plunging recently, after it reported its fourth-quarter results. The company actually beat Wall Street’s consensus estimates for the quarter, but investors focused their attention on management’s disappointing guidance. Meanwhile the stock value has fallen to $2.65 and it is not sure yet whether the resistance is at 2.65 or at 2.50. The metrics are looking very interesting at the moment.
Lumen’s fourth-quarter performance fell short of expectations, and the company’s 2023 outlook was also disappointing. Despite selling off two major businesses and undergoing a leadership transition last year, CEO Kate Johnson seems to be acknowledging the need for a complete reset of expectations and abandoning any pretense of short-term improvement in business performance. It includes investing in fiber infrastructure and increasing expenses in areas such as marketing, sales. But also efforts in platform simplification, enterprise resource planning, and digitization. All this sound like very unpredictable spending with not visible returns in the next months or years…
After accounting for the divestitures and the expiration of Connect America Fund II proceeds in 2022, Lumen’s total revenue decreased by 5.5% in the fourth quarter and 5.2% for the full year, which were comparable to the rates of decline during the same periods in 2021.
Further more over the past decade, Lumen has undergone a significant transformation, shifting its focus from consumers to primarily serving enterprises. This pivot became even more apparent in 2022 when Lumen divested its incumbent local exchange carrier (ILEC) in 20 of the 36 states where it operated, effectively eliminating nearly half of its remaining consumer revenue.
Goals 2023
However the company seem to set promising goals for 2023:
- Develop Customer Obsession
- Innovate & Invest for Growth
- Build a Reliable Execution Engine
- Radically Simplify Our Company
- Further Develop Our Culture
Enterprise customers focus
Lumen’s enterprise business, which now represents nearly 80% of the company’s total, has both positive and negative aspects. On the one hand, Lumen has a leading network that is essential to the backbone of the internet and the global data transport. Despite not being the top player in optical fiber holdings or enterprise communications services, there is some confidence that Lumen’s network will remain critical due to the increasing importance of a connected world. On the other hand, the company faces challenges such as overcapacity, stiff competition, and technological advancements leading to deflationary pricing and cannibalization of significant legacy revenue streams. As a result, it’s hard to anticipate that Lumen’s total enterprise revenue will return to growth in the foreseeable future. Customers are likely to prefer shared networks over private ones whenever possible.
LUMN Overview
Lumen Technologies, formerly known as CenturyLink, is a US-based telecommunications company founded in 1968. It offers a wide range of services, including internet, voice, managed services, cloud computing, and cybersecurity solutions to businesses and government organizations worldwide. With a global network spanning more than 60 countries, Lumen is one of the largest and most diverse communications companies in the world. Lumen Technologies is a major player in the telecommunications industry, providing reliable and secure connectivity solutions to support the digital transformation of businesses and organizations around the world.
Economic Moat
It’s hard to identify any Economic Moat. What sets Lumen apart from its competitors is its extensive long-haul fiber network. With over 450,000 route miles in its terrestrial and subsea transcontinental network, Lumen possesses capabilities that few other companies can match and is a leading player in meeting data transportation needs worldwide. As one of the few Tier 1 networks globally, Lumen plays a crucial role in the backbone of the internet, ensuring its smooth operation. Enterprises utilize Lumen’s services to transport data, both internally and to the public. Lumen seem to have some technical advantages through the shire size and inter-connectivity properties of its network.
Lumen presently provides broadband and landline phone services to consumers across 16 states, encompassing a significant portion of the western contiguous US and Florida. In the areas where Lumen maintains its presence, the company has been replacing its legacy copper network with fiber and remains committed to this transition. While the transition to fiber is commendable and enhances the quality of service, Lumen is faced with intense competition from a major cable provider across almost the entirety of its coverage area, and fiber penetration rates remain relatively low, hovering around 27% as of the close of 2022.
Finance Metrics
| KPI | 4Q21 | 1Q22 | 2Q22 | 3Q22 | 4Q22 |
|---|---|---|---|---|---|
| Total Revenue (Bil) | $4.022 | $3.924 | $3.928 | $3.836 | $3.800 |
| Adj. EBITDA | $1.496 | $1.452 | $1.373 | $1.322 | $1.393 |
| Adj. EBITDA Margin | 37.2% | 37.0% | 35.0% | 34.5% | 36.7% |
Ajusted EBITDA outlook for 2023 would be $4,600 to $4,800 billions. it has been $5,540 Billions in 2022.
Based on the information provided, it seems that Lumen is facing significant financial risks due to its high debt load and declining business. However, the company is not in imminent danger of failing to meet its obligations due to its strong cash flow and the fact that only a small portion of its debt matures within the next four years. Nonetheless, Lumen’s high debt-to-EBITDA ratio could make it vulnerable to an inability to roll over its debt, higher interest rates, or potential breach of debt covenants, especially if its business takes a bigger downturn.
In addition to these financial risks, Lumen is also facing operational challenges following the divestiture of its incumbent local exchange carrier. One of the biggest questions is whether the company can generate an acceptable return on the higher level of business investment it intends to undertake. There is a risk that Lumen may use cash that could otherwise be returned to shareholders on investments that generate meager long-term returns on capital.
Overall, it seems that Lumen needs to address both its financial and operational challenges to ensure long-term sustainability and success.
Recently Morningstar give LUMN it’s five Star rating as well so i would not be to worried on the debt risks at the moment.
Dividends decision
It appears that Lumen’s decision to eliminate its dividend in the fourth quarter of 2022 is a wise one. The high dividend yield was not providing support to the stock, and the company believes that debt reduction or share repurchases are better uses of free cash. It is worth noting that Lumen’s cash returned to shareholders should take the form of share buybacks for the foreseeable future, given the fundamental undervaluation of the stock in recent years.
In line with this strategy, Lumen announced a $1.5 billion stock repurchase program in the fourth quarter of 2022, which represents a significant investment relative to the company’s market capitalization of about $5 billion during the last two months of the year. By repurchasing shares, Lumen can return value to shareholders while also potentially driving up the stock price through increased demand.
Overall, it appears that Lumen’s decision to eliminate its dividend and focus on share buybacks is a prudent one given the company’s financial and operational challenges. However, it remains to be seen whether these actions will be sufficient to turn the company around and deliver sustained long-term growth.
Conclusions
LUMN at $2,66 seem to be very undervalued. It doesn’t mean that we will not see LUMN at $2,30 ot $2. The current week showed that the whole economic environment is fragile and markets are ready to switch into the fear mode. However the stable business domain and solid leadership team are giving hope for LUMN in much stronger position on the market in the longer run.
Disclaimer
Please keep in mind This is not investment advice.